General Mortgage Advice
1. I am new to mortgages, what do I need to think about?
There are three important things to think about when you take out a mortgage:
• find the mortgage that suits you and your circumstances;
• borrow an amount you can comfortably afford; and
• plan for changes – interest rates can go up, your income can fall, or you could lose your job.
There are lots of banks, building societies and specialist lenders offering mortgages. Many also offer special deals for first-time buyers. You can usually go to these lenders directly, although they will only tell you about their own products. Or you can go to a mortgage broker like Mortgage Advice Service who will be able to look at a wider selection of products for you.
2. How does a mortgage work?
You take out a loan based on how much you can afford and the value of the property, for a length of time agreed between you and the lender.
• You are charged interest on the loan, usually based on the Bank of England base rate, which is reviewed monthly.
• You pay the mortgage back in one of two ways, repayment or interest-only
• You can choose different deals for your interest rate, such as fixed or discounted
3. What is the difference between repayment and interest only?
You can choose to pay your mortgage back in the following ways:
• repayment;
• interest-only; or
• a combination of the two.
You'll need to decide which is best for you.
Repayment mortgages
Every month, your payments to the lender go towards reducing the amount you owe as well as paying the interest they charge. So each month you're paying off a small part of your mortgage.
The pros: It's a simple, clear approach - you can see your loan getting smaller.
The cons: In the early years your payments will be mainly interest, so if you want to repay the mortgage or move house in the early years, you'll find that the amount you owe won't have gone down by very much.
Interest-only mortgages
As the name suggests, your monthly payment only pays the interest charges on your loan - you're not actually reducing the loan itself. This is why it's very important you arrange some other way to repay the loan at the end of the term; for example, through an investment or savings plan.
If you choose this option you will need to check that your investment or savings plan grows accordingly, so that at the end of the term you'll have enough money to pay off the loan. If it doesn't grow as planned, you will have a shortfall and you'll need to think about ways of making this up.
The pros: Because you're only paying off the interest, and not the loan itself, your monthly payments will be lower.
The cons: That debt is not going to go away. Throughout the life of the mortgage, you'll need to check your investment or savings plan is on track to repay your loan at the end of the term. If you can't repay it at the end of the term you could lose your home.